Emerson Electric Is a Solid Pick Among Diversified Industrial Stocks

siraj is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Diversified industrial companies reflect the development of the world economy. Such companies' products impact every area of the world and every end market. Last year, their organic revenues steadily slowed down, as these companies grew in a continuous but slow manner in the U.S., while the European market was largely negative. Still, the first quarter of the year, which saw increased stabilization, showed that demand is not headed for the bottom.

Revenues and earnings were expected to keep advancing in the beginning of the new fiscal year. This indicates that ongoing revenues and earnings are not being held back by the current slow growth environment. Companies were expected to generate average Earnings Per Share (EPS) growth at a rate of 11.2% in fiscal 2013. This, if it occurs, reflects outsize earnings growth from the previous meager growth rates.

It is still possible that this projection could be revised down--that happened last year. Nevertheless, on the whole, the EPS of these companies will most likely improve. Factors pushing EPS in that direction include aggressive share repurchase programs, growth from acquisitions, and cost savings from restructuring.

In this article, I focus on Emerson Electric Co (NYSE: EMR), a stock that should be considered for its potential to return significant profits.

Business Model

Emerson Electric is a diversified industrial stock that designs and supplies products and technology and delivers engineering services. The company has four main business segments: Industrial Automation, Network Power, Climate Technologies and Commercial & Residential Solutions.

Due to recent volatile economic conditions, Emerson is not making any massive capital expenditures at present. At the end of Q1, its capital expenditure stood at only $115 million.  At the same time, the company is investing only in key strategic programs to make sure that it will be well-positioned when global economic growth picks up the pace.

Dividend Profile

Emerson has a long history of dividend payments. At present, Emerson offers a quarterly dividend of $0.41 cents per share. For the full year of 2012, it paid a dividend of $1.60 per share, which is up from $1.435 per share in 2011. As shown in the below table, Emerson has been consistently increasing its dividends. In the past five years, it has raised its dividend by 36.67%.

Year

Dividend

2012

$1.61

2011

$1.435

2010

$1.35

2009

$1.325

2008

$1.23

Morningstar.com

Financial Analysis

All of its four business segments are generating solid returns. At the end of Q1, it had been able to expand its revenue by 5% to $5.6 billion. On average, in the past three years, it has enlarged revenues by 6.7% while the industry average stood at a negative 0.4%. Additionally, it has shown solid margins while converting sales into earnings. As an indication of its solid margins, at the end of Q4, its Earnings Before Interest and Taxes [EBIT] margin stood at 13.1% and improved by 160 basis points.

After a modest year, the company has shown exceptional growth in its cash flows. At the end of Q1, its operating cash flow stood at $554 million, representing an increase of 66% over the past year. Its operating cash flows were expanded mainly due to high earning and lower working capital growth.

Furthermore, Emerson has hefty cash flows that adequately cover its dividend payments. Its free cash flows enlarged by 115% in the last quarter alone. At the end of the first quarter, its free cash flow stood at $439 million while its dividend payments accounted for $297 million. Its dividends are safe with hefty free cash flows. As an indication of strong cash flows, the company is also working share repurchase program. At the moment, Emerson’ financial situation is stable.

Competition

Emerson Electric’s main industry peers are 3M (NYSE: MMM) and General Electric (NYSE: GE).  At present, General Electric and 3M are focusing on enhancing their margins, and both companies are strongly working on restructuring program.  For now, GE is not making massive investments. The company is only focusing on strategic priorities. GE has a high debt to equity ratio of 1.9, while the industry average stands at 1.1. In the past three years, on average, its revenue growth was a negative 1.9%.

On the other hand, 3M's has high revenue and earnings growth rates, while its D/E ratio is low at 0.3. 3M has one of best cash conversion rates in the business at around 90-100 percent. 3M is a solid stock with strong financial position. Amidst all this, the stock looks overvalued at present.

Summary

Over the year, Emerson's stock has shown enjoyed exceptional surge with few shortfalls. At present, year to date, Emerson is trading nearly at its lowest point, which presents an opportunity to initiate a position in the company. Emerson is trading at a discount, with analysts estimating a mean target price of $61.27.

Emerson has a diversified revenue base and the potential to generate strong cash flows. Additionally, it is anticipating increasing its underlying sales by 2% to 5% in 2013, and achieving an EBIT margin expansion of 10 to 20 basis points. I think Emerson can be a safe pick for long term investors with its solid dividends and steady price appreciation.

For GE, the recent financial crisis struck a blow, but management took advantage of the market's dip to make strategic bets in energy. If you're a GE investor, you need to understand how these bets could drive this company to become the world's infrastructure leader. At the same time, you need to be aware of the threats to GE's portfolio. To help, The Fool's offering comprehensive coverage for investors in a premium report on General Electric, in which the Fool's industrials analyst breaks down GE's multiple businesses. You'll find reasons to buy or sell GE today. To get started, click here now.


siraj sarwar has no position in any stocks mentioned. The Motley Fool recommends 3M and Emerson Electric Co.. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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